US Retail Brands Are In Turmoil, And it’s Not All Amazon’s Fault

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Executives at a number of US retailers may be surprised to see Bloomberg’s headline on Friday: “Retail Sales Rise Most in a Year, Marking U.S. Consumer Comeback.”

This despite a number of America’s top retail chains reporting dire earnings reports and lowering their outlooks this week. Macy’s shares fell to a four-year low this week, with one analyst saying its woes could doom a third of US shopping malls. Kohl’s reported an 87% drop in net income for its most recent quarter. Nordstrom is cost-cutting following its drop. Gap Inc. may close more Old Navy and Banana Republic stores as its portfolio struggles. JCPenney shares sunk 10% on Friday morning after its disappointing quarterly report.

Kohl’s quantified its distress with the report of a sales drop of 3.7 percent and a profits plunge of more than half; sales at stores open at least a year were down by 3.9 percent. This followed an earlier report by Macy’s that first-quarter sales had fallen off by a huge 7.4 percent, while profit plunged by 40 percent; same-store sales were down by 5.6 percent, Macy’s fifth consecutive quarterly decline. Earlier, Gap said its comparable-store sales for the quarter would be down by 5 percent.

Signs of Optimism?

Yet the National Retail Federation released a cautiously upbeat report on Friday, stating that “retail sales surged in April, allaying fears of a consumer falloff… Excluding automobiles, gasoline stations and restaurants, sales rose 0.7 percent over March.” Retail sales advanced 1.3% in April from the prior month to a seasonally adjusted $453.44 billion, the Commerce Department said Friday—the best monthly gain since March 2015, as the Wall Street Journal noted.

Blame apparel peril, with clothing stores sales up only 1% in April, and department-store doldrums, where spending rose a meager 0.3% as the overall category was down from a year earlier. And as WSJ noted, “A chunk of the April retail-sales gain came from a rebound in sales at auto dealers and gasoline stations.”

After weak sales report from Macy’s, Kohl’s signaled its distress in its quarterly financial report, as overall sales tanked for the mid-priced apparel retailer. It’s the latest indication that the foundation is cracking beneath traditional bricks-and-mortar retailing.

The Wisconsin-based chain rode the effectiveness of a mix of popular mainstream and solid private-label apparel brands, and a heavily price-promotional approach, to nationwide expansion in the Nineties as Kohl’s proved to have a Midas touch for tapping into middle America. But lately some of its own missteps, the slump in apparel purchasing generally, and the challenge provided by e-commerce have dragged Kohl’s into a slump. Management shakeups and more digital initiatives haven’t turned things around quickly, and shoppers’ fickle tastes haven’t helped either.

The Amazon Factor

The chains are all trying new approaches, including experimenting with value-priced spinoffs, introducing new lines of merchandise and pursuing their own digital paths meant at circumventing the Amazon effect. Even Walmart is testing a shorter delivery window to compete with Amazon, while Macy’s also intends to roll out more digital marketing initiatives than before, while Nordstrom said it’s culling its online inventory to sharpen its e-commerce offering.

As noted by Money, Morgan Stanley estimates that Amazon currently makes up about 7% of the US apparel market, a figure that may increase to 19% by 2020. They also estimate that the online retailer sells more apparel than all US retailers combined, with the exception of Walmart.

But as the Wall Street Journal notes, the retail sector crisis isn’t all Amazon’s fault:

Retailers’ problems go deeper than shifts in where consumers are buying goods. One is that prices for many of the things they sell are rising more slowly than overall prices, or are even falling. Apparel prices, for example, were down 0.6% from a year earlier in March, according to the Labor Department. So even if apparel retailers manage to sell more items, it is hard for them to generate sales gains. And with wages and other costs rising faster than prices, profit margins are coming under pressure.

Why Shoppers Aren’t Shopping

Consumer behavior is shifting away from being “consumers” to using discretionary spending to invest in experiences, too.

Americans are directing an increasing share of their spending on services. Over the past decade, for example, total consumer spending on clothing and footwear has risen just 1% annually, unadjusted for inflation. Spending on cable and satellite television and radio services has increased at a 5.1% rate.

That partly reflects a change in attitudes that came about in the wake of the financial crisis. Not only are people being more careful about spending, they are being careful about where they spend. In many cases they are opting for experiences like going out to restaurants and taking vacations over accumulating more stuff.

“There seems to be some more macro issue, given both performance of ourselves and our competition,” said Kohl’s CFO Wes McDonald on a conference call with investors Thursday. “There seems to be some change in consumer behavior.”

“The uncertainty is lending fresh urgency to the challenges facing old-school stores, whether it is adjusting to the reality of online commerce or watching their customer base shift from big-spending baby boomers to the more cautious millennials,” the Washington Post noted, adding: “The industry is suddenly awash in talk about being ‘overstored‘ — too many physical outlets chasing too few shoppers.”

Unless these trends changes—and there’s no sign that they will any time soon—retailers’ woes will continue. Macy’s CEO Terry Lundgren, for his part, believes that American consumers’ spending in general could rise later in the year with the continued cooperation of lower gasoline prices.

Of course, even with a little more money in their pockets, people won’t necessarily head to the traditional places to spend it, and they may decide to pamper themselves — or schedule a short getaway to escape all the doom and gloom — instead.

 

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